The housing market is up! No, wait – it’s down! Oh no, watch out for these warning signs! Let’s be real here for a moment: you can’t live your life or run your business by the daily headlines, but you do need to hedge your bets against a changing market.
By “changing market”, we’re not only talking about the big national trends that drive housing across the USA – we’re also discussing local market trends that are far more likely to affect your real estate business, and far less likely to get any media coverage to let you know that change is underway.
Ultimately, when it comes to the real estate market, all economics is local economics – and you’re the best judge of where the market is going, if you’re sage enough to read the tea leaves telling you where things are going. Knowing what’s happening in your market will give you the power to:
- Recognize which lead sources are hot and which are not.
- Advise your buyers and sellers in such a way that will result in the best outcome.
- Set expectations for negotiations.
- Know how to correctly price your listings depending on market conditions.
- Speak knowledgeably to both buyers and sellers and avoid being a secret agent.
Before we get to gauging your market, though, let’s take a moment to review some basic rules that will help you achieve success in any market conditions:
- Embrace the fact that you can make money in ANY type of market conditions, buyer’s market, seller’s, or balanced. You just have to adjust your focus and your skill.
- Know your numbers like the back of your hand. Watch your daily ‘hot sheet’ in your MLS, read your local real estate news, and do regular research. This includes ‘micro-markets’ within your main farm area. Know the Average Days on the Market, List to Sell Price Ratio and absorption rates.
- Know what’s happening in different price ranges and different areas of your market. New construction, first time buyers, luxury real estate and move-up homes. What’s happening to one segment may not be happening to another.
- Be willing to make changes quickly, based on your market research, experience and the facts.
- Always have a coach. This way you’ll be educated, motivated and accountable regardless of market conditions.
Got it? Excellent! Now let’s get specific on how to know exactly what’s happening:
What does ‘Month’s Supply’ or ‘Absorption Rate’ actually mean?
Months of inventory, or the term “absorption rate” are used to the measure of how fast the market would be depleted of inventory if both supply and demand remained constant, and no new listings were added to the market. It’s based on a snapshot of today’s inventory and the market’s ability to ‘absorb’ it.
A simple example:
Say there are 100 homes For Sale at the end of the month. In the same month, 10 homes sold. Based on this current month’s sales rate of ten homes, you could divide 100 homes for sale, by 10 homes sold this month to arrive at 10 months supply of inventory based on the sold rate of the current month.
If there are only 10 homes for sale and 10 sell per month, you have a 1 month supply.
It’s helpful for you to do these studies by price range and area, versus relying on ‘big picture’ numbers. Your ‘town’ may have a 5 month supply on ‘average’, but your farm area or zip codes you work could have more or less than that. Look at each home as it’s own ‘case study’ before you advise your buyers or sellers.
You may advise a buyer to give highest and best when they’re in a market with a very low supply of homes, low average days on the market and high list to sell price ratio.
The next appointment you go on may be on a luxury listing, with competition from both other luxury neighborhoods and new construction. In some areas you may have a 3 YEAR supply of listings. You’ll handle that appointment very differently than you did the buyer appointment we just mentioned.
You have a Months of inventory figure, what do we do with it and what does it mean?
We typically judge months of inventory on three criteria. It’s either a buyers market, a sellers market, or a balanced market. Generally, a seller’s market occurs when months of inventory is under 6 months. It’s called a seller’s market because the supply and demand favors the seller. In these circumstances, there are many buyers for every house that is for sale. Supply and demand would indicate higher prices for sellers and more competition amongst buyers. A Seller’s Market = Good for Seller’s.
How do you know it’s a Seller’s Market?
- Mulitple offers on most listings.
- Escalation clauses, guaranteed appraisal discrepancies and as-is purchases are common.
- FHA and VA buyers as well as low-down payment buyers are non-competitive. Writing ‘contingent on home sale’ is unacceptable.
- Sellers are in control. They negotiate lease backs, higher earnest money deposits, back up offers and anything else they can build into the deal.
- There is pressure on listing agent’s commissions since sellers know they will likely have a quick sale.
- Listing agents have a constant pressure of maintaining a steady supply of ‘coming soon’ inventory. It’s harder to build listing inventory since things are moving very quickly.
- Buyers agents have to become much more aggressive and search for pocket listings, unrepresented sellers, new construction and other, non-public listings.
- Very few BPO orders, very few Short Sale and REO listings
- Lots of new construction, not all builders paying a normal commission.
- Even high end listings are selling quickly, sometimes with multiple offers.
A buyer’s market is just the opposite. Demand is less than supply, so naturally this situation would favor buyers. Because there are lots of houses available on the market, and only a few buyers, sellers have to be very competitive in pricing their homes. Overpriced homes in a buyer’s market are destined for multiple price reductions, expiring, and suffering long days on the market and low offers before they finally sell. A Buyer’s Market = Good for Buyers.
How do you know you’re in a Buyer’s Market?
- There are more listings than buyers to buy them. Condos and higher priced homes, as well as 2nd home markets are hit first.
- Sellers have to have the best home for the least price to sell quickly.
- Proper presentation and staging is critical. Allowing each and every showing is critical.
- Buyers agents have more control.
- The buying process is longer, since there’s more to show and more to see.
- Builders are far more negotiable and often put commission bonuses on spec homes.
- Buyers are in control. They may see a home 3 or 4 times before making a decision, be able to get a home for far less than list price and negotiate inspection items to their benefit.
- Contracts that are contingent on home sale may actually work. VA, FHA and low down payment buyers are more likely to buy.
- Lots of BPO orders, more Short Sales, REO listings.
- Often a price reduction will cause a home to become a Short Sale that wouldn’t otherwise have been one.
So what does a Balanced Market look like?
Signs of a Neutral Market
- Inventory is normal as compared to previous normal months / years.
- Three to six months of inventory is on the market.
- Comparable sale prices are close to active listing prices.
- Sales numbers have stabilized.
- Median sales prices are flattened.
- For Sale signs are replaced with pending or sold signs within 30 to 45 days.
What do to make money regardless of what’s happening?
Fundamental Rules For Success:
- Have at least 5 strong ‘spokes’ of business at all times.
- Practice Relentless Lead Follow Up and track all of your business using white boards as described in our coaching.
- Know your market as if it’s your JOB to report on it.
- Stick to the basics of making money in real estate. Your daily schedule should never vary from: Lead Generation, Lead Follow Up, PreQualifying, Presenting, Negotiating, Closing…lather, rinse, repeat.
- Be competitive as both a buyers agent and a listing agent. Set high standards for yourself. Be the buyers agent who actually gets the house for your buyer. Be the listing agent who has close to a 100% listing to appointment ratio.
- Be relentless on your pricing. Preview if necessary prior to each listing appointment.
- Don’t take no for an answer when a yes is still possible. Push harder than you normally do. The average close happens after 5 to 8 attempts!